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Micron Plans to Cut Memory Chip Production by 5 Percent

Micron Technology plans to reduce its output of DRAM and NAND by around 5 percent this year, moving to cut production as its customers delay orders for short-term memory and long-term storage used in servers, phones and personal computers. Micron also said it would cut $500 million of capital spending in 2019, bringing its projected total to $9 billion. The company has struggled in recent months as DRAM and NAND prices have plunged.

Last week's announcement came as Micron reported earnings for the second quarter of the 2019 fiscal year. Sales shriveled to $5.8 billion, down 21 percent year-over-year and down 26 percent quarter-over-quarter. Profits were around $1.6 billion versus $3.6 billion in the second quarter of 2018. Profit margins—taking into account production costs but not other operating expenses—dropped to 49.1 percent, down from 58.1 percent over the last year.

The company's sales contracted for the first time since the first quarter of the 2017 fiscal year. Many of its largest customers have more inventory than they know what to do with. Amazon, Microsoft, Google, and other cloud computing firms, which spend billions of dollars on memory and storage every year to expand their data centers, have slashed orders in recent months. They are working through their stockpiles of unused parts, Micron said.

Micron, which manufactures chips used as the main memory and storage in all sorts of devices, has also suffered from slumping smartphone sales growth and shortages of personal computer chips from Intel. The company said that at the end of the second quarter it was holding $4.4 billion in unsold inventory, up from about $3.9 billion at the end of the first quarter. The company sees demand bouncing back in the second half of the calendar year.

Micron said its DRAM revenue had declined 28 percent from the same quarter last year and 30 percent since the end of the first quarter. DRAM accounted for 64 percent of the company's total second-quarter sales. DRAM demand has dropped off since the fourth quarter last year. Memory chip manufacturers like Micron have reigned in production to balance out supply and demand, which is what determines average selling prices for NAND and DRAM.

DRAM prices, on average, have slipped around 30 percent in the second quarter, according to market researcher DRAMeXchange.

Many of the largest manufacturers of memory chips are scrambling to supress their capital spending as a result, said DRAMeXchange analyst Ben Yeh. Following Samsung's lead, Micron announced in December that it would hold off on $1.25 billion of capital spending this year, dropping its planned spending down to around $9.5 billion. Others are pushing back the production of more advanced, higher-capacity memory chips in an attempt preserve profit margins.

Demand for NAND has been dropping for the last year, dampening the part's average selling prices. In the second quarter alone, average NAND prices plunged around 20 percent, according to estimates from DRAMeXchange. Micron, which made 30 percent of its total revenue last quarter from NAND, said that its second-quarter storage sales had declined by around 18 percent quarter-over-quarter. Other big NAND suppliers include Samsung, Toshiba and SK Hynix.

Despite its planned production cuts, Micron said that its struggles would continue in the current quarter. The company plans to report revenue in the third quarter of around $4.8 billion—plus or mius $200 million—a decline of 38 percent in revenue year-over-year. Micron projected profit of around 85 cents per share, plus or minus 10 cents, in the third quarter ending in May. That compares to profits of $3.10 per share reported in the same quarter last year.

Micron said that the worst of the slowdown would be over by the fiscal fourth quarter. "We expect growth to resume in the second half of calendar 2019 as we see improvement in our customers' inventory position," said Sanjay Mehrotra, Micron's chief executive, on an analyst conference call last week. "Our strategy positions us for the tremendous opportunities ahead, while also enabling us to better navigate near-term headwinds," Mehrotra added.